The relationship between earnings per share and dividends per share of companies listed at the Nairobi securities exchange

Abstract

The relationship between EPS and DPS isn‟t a straight line relationship as the percentage of earnings paid off to the shareholders as dividends isn‟t definite and fixed. The objective of this study was to establish the relationship between EPS and DPS for companies listed at the NSE, the results of which will be of great importance to the companies, the investors, the stock brokers and even the general public in decision making. This study adopted a correlation research design with the population of the study being all the 64 companies listed at the NSE as at December, 31 2014. The sample size was all the 64 companies listed at the NSE but data for only 38 firms was available for the period. A 10year period during the year 2005 to 2014 was covered. The analysis of the study was based on secondary data and involved the use of descriptive analysis, correlation analysis and multiple regression model given that various variables were adopted as independent variables. The study found that EPS had a positive and significant effect on DPS while leverage, liquidity, and retained earnings had negative but insignificant effects on DPS. It is, therefore, concluded that dividend policy of a listed firm in Kenya is strongly influenced by earnings per share i.e. the higher the EPS the higher the DPS but not by leverage, liquidity or retained earnings. The study recommends that firms should focus on improving their earnings in as this will translate to a positive dividend policy. Investors and analysts who are interested in investing in firms that can pay higher dividends should use the EPS as a basis for forecasting the DPS of the firms in which they seek to invest or advise their clients on where to invest. The study also recommends that policy makers should incorporate the role of EPS in assessing the DPS of firms. As such, policies that help improve the earnings of firms should be encouraged to enhance dividend payments for listed firms as well as for other organisations. It is suggested that more studies be carried out in this area to examine other determinants of dividend policy other than EPS, leverage, liquidity, and retained earnings. Such studies will help improve the understanding on how dividend policies in organisations are shaped.